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The Canadian oil and gas industry is asking Ottawa for subsidies that could be worth $2 billion in tax savings to encourage the development of liquefied natural gas plants in British Columbia.

Giving the industry a tax break would make the LNG export industry more competitive and influence investment decisions favourably, David Collyer, president of the Canadian Association of Petroleum Producers, argued in an appearance last fall before the standing committee on finance. The committee was holding pre-budget consultations in advance of the 2013 federal budget, expected to delivered next month. It has since recommended “that the federal government expeditiously encourage and support the development of infrastructure in relation to liquefied natural gas exports.”

Collyer said the industry wants to see a change in the tax treatment of liquefied natural gas plants regarding capital cost allowances. LNG plants are considered to be part of the gas transmission process, and receive an eight-per-cent-per-year capital cost allowance. CAPP wants them to be reclassified as manufacturing plants, which would receive a 30-per-cent capital cost allowance when they are built.

The change would mean they could write off 90 per cent of their investments in seven years, rather than the 27 years it takes under current tax regulations, Collyer said.

In his submission to the finance committee, Collyer said that changing the rules for the industry would “positively influence near-term final investment decisions for LNG liquefaction facilities.”

In an interview Thursday, CAPP spokesman Travis Davies said the industry needs the tax concession because it sees an urgency in getting the plants built to take advantage of favourable market conditions. It is competing with regions such as the U.S. and Australia, where the after-tax cost of spending is less.

“Our position is that liquefied natural gas is more like a manufacturing process than an exploration production process, and given some of the stiff competition we are facing, it would certainly make us more competitive in terms of making a market window and getting some of these projects underway,” Davies said.

CAPP has not estimated the value to its members of the tax saving, said Davies. However, Kin Lo, an associate professor at the University of B.C.’s Sauder School of Business, estimated it at $75 million to $100 million over a seven-year period on every billion dollars invested — numbers Davies said involved several assumptions the association was not comfortable in making.

The rationale for a higher capital cost allowance for manufacturing is that it stimulates investment and jobs. Nationally, manufacturing accounts for twice as many jobs as the oil and gas sector, which is twice as large in terms of its economic contribution.

The B.C. government anticipates $20 billion in LNG investment in the province, but unlike most manufacturing, the number of jobs would be low. Only 800 permanent jobs are expected.

Using Lo’s numbers, that would mean a tax break of between $1.5 billion and $2 billion over seven years for 800 permanent jobs.

Energy Minister Rich Coleman has asked federal Finance Minister Jim Flaherty to include the tax change in the 2013 budget. In a Dec. 11 letter to Flaherty, Coleman said the province needs to out-compete other countries “in the global LNG race.”

“I view the CAPP proposal as beneficial to our collective interests and hope you are able to incorporate this change in your upcoming budget,” Coleman said.

The government position on the subsidy is that any impact on provincial revenues would be more than offset by the investment decisions, which would impact jobs, provide economic benefits to the whole province and generate new incremental revenues.

Lo said he believes the industry is looking for favourable treatment from the government, which it might not get based on tax interpretation alone. He called it a subsidy because a liquefaction plant would likely not be considered a manufacturing process under tax regulations. The liquefaction process only transforms natural gas temporarily, he said.

“I would call it a subsidy in the sense that if the government does agree with this request, it is a tax concession,” said Lo.

“It is a more favourable tax treatment than what would be applied to other industries for doing what would amount to a similar thing, which is transportation.”

CAPP approached the finance committee, rather than the tax department, because the association views it as an issue of policy, not interpretation.

The industry argued before the finance committee that LNG is a manufactured product based on the assumption that the new plants will remove small amounts of impurities missed in the initial processing facilities near the wellhead. Small processing plants that straddle pipelines to process out residuals do receive the manufacturers’ classification.

That argument doesn’t wash with the Canadian Taxpayers Federation.

“It’s fair to say we shouldn’t be extending the same kind of tax breaks that manufacturers get to LNG,” said Canadian Taxpayers Federation director Jordan Bateman. “Manufacturing and what an LNG plant does are completely different. This isn’t free money. This is money that will come out of British Columbians’ pockets.”

The rate of capital cost allowances is controversial in the post-recession economy. In the U.S., President Barack Obama has increased the rate. The Canadian Manufacturers and Exporters supports a high capital cost allowance, estimating that the positive cash-flow benefits boost investment in the country. A temporary increase in the Canadian capital cost allowance from 30 per cent to 50 per cent in 2007 to ward off the worst effects of the recession increased investment by more than 11 per cent, the manufacturers association says. The accelerated rate is to expire at the end of 2013 — before any LNG plants would be built — unless the government extends it in the 2013 budget.

The Canadian Labour Congress also supports high capital cost allowances for manufacturing, because manufacturing is generally a high-employment sector of the economy.

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